Medical robotic company needs to consolidate its shareholder base to complete
its transformation from R&D-focused start-up to growth medical tech
firm.

R&D intensive start-ups, with their protracted gestations and interminable investment rounds, often produce disruptive products and then lack the commercial wherewithal to effectively bring them to market. ProSurgics, founded by Patrick Finley in 1996 in response to an OECD feasibility study into potential applications for robots in healthcare, burned through £12m of investment over 13 years, with no financial reward for its backers.

It did, however, develop three robots in the process. One of these, a surgical robotic ‘hand’ that allows operating surgeons to control a camera during keyhole surgery, was identified by the company’s board as having the most commercial potential.

Because of shorter recovery times and the reduced threat of complications, keyhole, or ‘laparoscopic’, surgery allows hospitals to treat patients more quickly than open surgery does. Traditionally, an assistant surgeon is needed to hold and operate the camera on behalf of the operating surgeon, often for as long as five hours. “Surgeons complain about being sea sick even after a 30-minute operation,” says chief executive Douglas Le Fort, who joined the Bracknell-based business in 2008. The company’s product also liberates skilled assistant surgeons from what is essentially a menial task.

At the beginning of last year, encouraged by FDA approval in the States and an EC mark in Europe, ProSurgics launched an aggressive sales push in the UK, US and Germany in an effort to exploit a market growing by 8pc annually. It believed its robotic hand, which can make surgical procedures as much as 25pc faster, would fly off the shelves at £10,000 a piece and its enduring investors would finally start to see a return. The company planned to use any profits to fund the development of new products. Its optimism proved misplaced.

ProSurgics finished last year with a turnover of £800,000 having projected more than three times that. “We launched on top of everything imploding,” says Le Fort. “Capital was being prioritised for established products. While the surgeons got the benefits, rather than seeing the long term efficiency this could bring, the hospital CEOs were very much, ‘this month I’ve got to save money’.”

Mark Kirby, who has more than 25 years’ experience in growth healthcare businesses, was headhunted as a non-executive chairman and tasked with reappraising the direction of the business. “This was a small company attempting to do a multi-country launch while continuing to develop the products behind it,” says the 53-year-old. “And the market had changed. The need for the product was still there but the capital conditions were constrained.”

Kirby found the business in need of more expansion capital and suffering from strategic inertia, a symptom of the array of backers it had attracted over the years. Its major investors include Chord Capital, Norwegian fund Fritas A/S and healthcare VCT Hygea, but a host of small stakeholders take its investor count to more than 200. “We had a small company with board meetings of 12 people or more. People come with prejudices and it creates diffusion. Five or six is the right size to run a business like this.”

Last November, Kirby led the formation of a new company, FreeHand Surgical, acquiring the assets of ProSurgics and raising a further £3.5m from Chord, Hygea and Fritas. Wasn’t that a big ask given the history of the business? “We needed to go back to the existing investors and say, ‘unless you support this, it’s not going anywhere’” says Kirby. Not unreasonably, the response from the investors was, “we’ve already blown £12m and not got anywhere”. They were eventually convinced by the scale of the changes Kirby effected in the business. “What we [had been] doing was engineering-led. We needed a clean break and to commercialise it.” The board headcount was slashed, the sales geography reduced to the UK and east coast of the US and, crucially, the original sales strategy was scrapped.

Instead of asking for significant up-front capital expenditure from hospitals, FreeHand finds surgeons who are likely to complete a number of keyhole operations each week and places the robot for free. Its revenues come from a disposable zoom module and sterile sleeve that needs to be replaced before every operation. At £125 a pack, the disposable sales will usually make a placed FreeHand robot profitable within three-and-a-half months. “This is all about utilisation; getting surgeons using it and not just having a nice bit of kit parked in the hospital,” says Le Fort. Now, the business expects revenues to hit £5m by 2012, and Le Fort believes austerity Britain and healthcare reform in the States could be a boon. “We’ve got demonstrable evidence that we could cut the costs of operating theatres, some of the most expensive places on earth. Hospitals in the States have tens of millions of dollars in deficits and they know that in two or three years they’ve got to bring in 20pc more people,” he says. FreeHand is currently operating at a loss, but expects to make its first profit at the end of 2011. Revenues are split three ways between the UK, US and the rest of the world, but the new focus means the UK will expand first, with the US expected to outstrip it by the end of next year, based solely on east coast sales.

“There are 2.5 million laparoscopic cases in the States each year, we sell the disposable for £125. It’s a £300m market. As a small company you only need a small penetration on that before you make it very meaningful.” Its existing rivals are either mechanical and static – meaning a surgeon has to “down kit and move it” – or expensive robots that are purely “capital plays”, at around £30,000, so the company is keen to exploit its cost and quality advantage now.

To do that, it will need to raise a further £2m from new backers by the end of the year. “We need to convince VCs that we’ve got a strategy that will work. They’ll know the old history,” concedes Le Fort. “We know there’s a list of things we need to do to persuade investors,” says Kirby. “We’ll make sure the business model works in the UK and that we’ll roll it out in the US with distributors. If you go to a VC and say, ‘we’re going to tackle the US from here and we’ll be massive’ it’s not going to work.” He’s weighing up the benefits of approaching a cornerstone American investor as part of the next round to help the business gain traction in the US market.

Kirby is also painfully aware that having more than 200 shareholders “is a bit of a turn off” for prospective investors. “57 shareholders account for 91pc of the equity, another 150 who invested early are still there. In an ideal world, you want to keep your shareholder base fairly small because it makes it more attractive for venture capital funds that want to come in. How do we let them go and move the company forward with the right corporate structure?”

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